End of an Ayres?: Federated's planned acquisition of May likely to doom brand name founded in Indy

March 14, 2005

When Indianapolis residents talk about shopping trips to L.S. Ayres, they are as likely to mention a visit 30 years ago as an excursion last week to check out the new spring fashions.

As retail options have spread beyond regional shopping malls, stores like Ayres are no longer considered at the forefront of fashion. So, while Lyman S. Ayres and the company he founded in 1874 are an important part of the city's social history, in the present-day retail world, Ayres' company is destined to become just that-history.

With Federated Department Stores Inc.'s Feb. 28 announcement that it plans to buy Ayres' parent May Department Stores Co. for $11 billion in cash and stock, analysts speculate Federated will erase the L.S. Ayres name as it has done with other acquired regional brands, including Lazarus.

"It's probably inevitable because Ayres is a regional brand name," said Richard Feinberg, a professor of retail studies at Purdue University.

Like its counterparts in cities nationwide, Ayres is a victim of big-picture mismanagement on a corporate level, Feinberg said. Department stores' sluggish response to changing tastes has resulted in customers' increasingly shopping at discounters such as Kohl's and Target for everyday clothes and home goods, he said.

"Department stores have been slow to recognize the sweeping historical demographic trends and have not reacted to it," he said. "We who have studied this industry have known for a long time that they are losing market share."

Locally, Cincinnati-based Federated has two Macy's stores, formerly known as Lazarus, and St. Louis-based May has five L.S. Ayres stores. The competitors share space in two malls, Castleton Square and Greenwood Square. On a national basis, analysts expect Federated to close about 75 of the 93 overlapping stores. The others will likely be rebranded, they say.

But in the three remaining local malls-Glendale, Washington Square and Lafayette Square-Federated has closed Lazarus stores in the past five years, citing lower-than-acceptable sales. That may not bode well for the Ayres stores in those malls once the merger is complete.

Department stores typically don't release sales figures for individual stores, but if Federated's standards are higher than May's, those three stores may be on the chopping block, said one local developer and former retail executive.

All three malls have struggled to retain and attract tenants, particularly anchors, as newer shopping centers have been built farther out in the suburbs, closer to where shoppers with higher disposable incomes live. Losing Ayres would only add to the malls' troubles.

Mall owners, however, remain optimistic.

"I think Ayres has a bit of a different performance and perception than Lazarus did when Federated operated at Glendale," said David Lee, director of asset management for Kite Realty Group Trust. Kite has owned Glendale since 1999, when it bought out the remaining two years of Lazarus' lease. "Ayres has traditionally been a very good operator and continues to be so."

Simon Property Group Inc. CEO David Simon was similarly optimistic about the merger in a March 8 conference call with Smith Barney analysts. Federated is Simon's second-largest regional mall anchor, renting 9 percent of the square footage of Simon's regional mall total. May is the fourth-largest anchor tenant, according to company filings.

Federated stores are generally welloperated and continue to generate traffic to Simon malls, Simon noted. Also, he said, he's not worried about filling any space Federated might leave empty.

"[It's] a terrific opportunity for us because we can bring uses into the mall that ... will be better and more profitable than the existing department store box," Simon said in the conference call.

But Washington Square and Lafayette Square malls, both owned by Simon, aren't the company's typical regional malls. Lafayette Square has lost two of its four anchors-one of which was replaced with a church-in the past five years. Washington Square is on the rebound after losing two anchor tenants, with a new Dick's Sporting Goods and a Kerasotes Theatre.

Federated declined to discuss the future of the merged company's stores in specific markets, saying only that those issues would be addressed once the merger is complete.

If Federated closes stores, analysts said, possible replacements in malls fall into two camps-discount stores or upscale department stores, retail segments that continue to grow at the expense of middle-market retailers like L.S. Ayres.

"Wal-Mart and Target are becoming those kind of corner stores [in malls] and are moving out of less desirable locations," said Rich Hummel, a retail analyst with Columbus, Ind.-based Kirr Marbach & Co. LLC.

In other malls, more upscale department store brands such as Nordstrom or Saks may fill space vacated by Federated, similar to Saks' taking over a vacant Jacobson's store at Simon's Fashion Mall in 2003 after the Jacobson's chain went bankrupt.

While department stores such as L.S. Ayres and J.C. Penney have been losing market share to discounters over the years, high-end stores have kept more customers by offering in-demand designer goods that can't be found elsewhere.

Analysts expect future consolidation in the department store industry to further separate the two segments. Alabama-based Saks could sell its Parisian unit, for instance, while family-owned chains such as Dillard's or Von Maur could be rolled into a larger company like Federated.
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